A series of (un)fortunate events: Commercial bank interest rates and deposit reallocation during the Great Depression in the Netherlands

Abstract

During the global economic crisis of 1929–33, deposits in the Dutch commercial banking sector sharply declined as funds shifted to the government-guaranteed Post Office Savings Bank and other savings institutions. Unlike earlier studies for neighbouring countries, we demonstrate that this shift was driven less by a flight to safety and more by a reduction in long-term interest rates on savings accounts offered by commercial banks, whilst the rates offered by the Post Office Savings Bank remained stable. Through a series of policy measures resembling financial repression, the Dutch government actively encouraged this shift to ensure a steady demand for government debt amongst savings institutions. As the demand for loans decreased, commercial banks managed to retain their profitability by reducing lending to smaller, less profitable businesses, as evidenced by higher minimum loan sizes, a preference for existing clients over new ones, and increased requirements for tangible collateral. This strategic move to eliminate less profitable loans from their portfolios enabled banks to weather the period with minimal damage and prevent an outright banking crisis, but it did contribute to a substantial reduction in private credit.